Diageo (LSE:DGE) investors are experiencing little respite as the FTSE 100 company’s share price continues sliding. At 17.40 per share, it declined again on Thursday (6 November) after a cut to full-year sales and profit forecasts.
Diageo shares are now down 25% over the past 12 months. Over a three-year horizon they’ve halved in value, shredding the firm’s reputation as a safe-as-houses defensive play.
As an investor, I’m considering how much worse things can get for the Smirnoff and Guinness manufacturer. Yet at the same time, I’m also thinking about whether its share price slump represents a dip-buying opportunity for a long-term investor like me.
More bad news
In Thursday’s market update, Diageo announced a 2.2% decline in reported net sales. On an organic basis revenues were flat, as the boost from higher volumes was wiped out by a worse price mix.
This was largely due to weakness in the Chinese white spirits (CWS) category, the firm said. It also suffered from tough consumer conditions and competitive pressures in the US spirits market.
It wasn’t all bad, with organic net sales increasing in Europe, Africa, and the Latin America and Caribbean (LAC) region. But drops in Asia Pacific and North America meant the company’s now expecting full-year organic net sales “to be flat to slightly down” compared with its previous forecast of unchanged revenues.
Organic operating profit’s also tipped to grow by low-to-mid single-digit percentages. A mid-single-percentage rise had been predicted.
Questions
This latest update again raises questions over Diageo’s ability to respond to changing consumer tastes. In times gone by, shoppers filled their trolleys with the company’s popular premium labels in good times and bad.
Other worries include whether weight-loss drugs like Ozempic are having a seismic long-term impact on alcohol demand. In times like these, investors look to strong and stable management for reassurance.
This isn’t the case at Diageo — chief financial officer Nik Jhangiani remains in interim charge following chief executive Debra Crew’s departure in July. Jhangiani had said a permanent successor would likely be announced by the end of last month.
Here’s what I’m doing
These are undoubtedly tough times for Diageo. But it hasn’t become a basket case. Sales outside of North America and Asia provide cause for encouragement, as does the company’s move into fast-growing categories like non-alcoholic drinks.
Furthermore, its Accelerate streamlining programme is helping the business to navigate current tough conditions. Diageo says “cost savings guidance of c.$625m over the next 3 years [are] fully on track“.
Today, Diageo shares trade on a forward price-to-earnings (P/E) ratio of 13.6 times. That’s well below the 10-year average of 21 times, and in other circumstances represent an interesting dip-buying opportunity I’d consider.
As it stands, I’m happy to sit on the sidelines given I already hold shares in the company. I’m confident the Diageo share price will rebound strongly over time. The dozen-or-so ‘billion-dollar brands’ in its portfolio leaves it well placed to capitalise on a market recovery, and on the wealth boom in emerging markets.
But until the outlook becomes clearer and lead management gaps are filled, I don’t plan to raise my stake in the FTSE company.
